California Spinning! Occidental Petroleum To Spin Off California Assets

After Murphy Oil (MUR) announced a spinoff in late 2012, Deutsche Bank analyst Paul Sankey had a few ideas for whom the next spinoff candidates in the energy space might be. His top picks? Hess Corporation (HES) and Occidental Petroleum (OXY). Congrats Mr. Sankey, you deserve a nice pat on the bac,k because not one, but both companies have since announced spinoffs.

His predictions became 100% accurate just last week when Occidental Petroleum announced that it would spin off its California operations into a standalone company. The move wasn’t a total surprise though as the company hinted at a possible spinoff after initiating a strategic review of its assets in late 2013. On that conference call, a certain Deutsche Bank analyst doggedly pestered the CEO for some insight on the company’s plans for those assets and came away guessing at a spinoff. Well done again Mr. Sankey.

So what exactly is being spun off here? According to the press release:

The new California company will have 8,000 employees and contractors and will establish its headquarters in the state. It will be California’s largest natural gas producer and the state’s largest oil and gas producer on a gross-operated barrels of oil equivalent basis. This new company will be the largest oil and gas mineral acreage holder in the state with approximately 2.3 million net acres, and will have major operations in the state’s high-potential oil and gas basins, including Los Angeles, San Joaquin, Ventura and Sacramento. Last year the California business earned approximately $1.5 billion on a pre-tax basis. Earnings before income, taxes, depreciation and amortization were around $2.6 billion with capital expenditures of approximately $1.7 billion. Due to these strong results, capital expenditures planned for 2014 were increased to $2.1 billion. The company is expected to have a strong and competitive balance sheet with between $4 billion and $5 billion of funded debt.

For a very simple view of the new company, check out this 2-page fact sheet detailing its operations and financial results. The California assets have not performed as expected and many were skeptical of its future when the spin idea was first floated last year. According to RBC analyst Leo Mariani, ‘it’s really about execution…if they can deliver, they can grow California effectively as a stand-alone company.’ Perhaps the stronger focus will help on the execution side, but this is clearly perceived as the ‘bad’ asset company in a difficult operating environment.

The parent company will retain the Occidental name and move its HQ down to the Houston area. Apparently, OXY’s CEO Steve Chazen recently purchased a home in the area so many have been speculating at such a move. It also makes sense given the size of the company’s exposure to assets located in the Lone Star state. In addition to its Texas E&P assets, OXY will retain the company’s E&P operations elsewhere in the world along with OxyChem and a midstream and marketing segment.

The new company’s management team is expected to be unveiled later this year and the company announced that Mr. Chazen will remain atop of OXY until the 2016 annual meeting. Ambassador Ed Djerejian will remain OXY’s Chairman for another year. The spin is expected to be completed by the end of this year or in the early parts of next year. 

This move represents another milestone in OXY’s efforts to slim down following the ouster of long-time (and highly paid) Chairman Ray Irani at a contentious shareholder meeting last year. The company has been selling off other assets including most recently its assets in the Hugoton Fields for $1.4b, the proceeds of which will be used for share buybacks. The company also announced it will ‘reduce’ its prop trading activities, a significant change of heart just a few years after bringing in commodities heavyweight Andrew Hall and Phibro just a few years ago. Some are even speculating that the company will unload (or even possibly spin off) its Middle Eastern assets in order to purely focus its efforts on Texas.

So will this start a new trend in the space for the majors? This Forbes piece lays out the case, but ultimately argues that the other majors will not follow in OXY’s footsteps due to the current benefits of operating refineries in the US. In fact, the article even quotes Mr. Sankey as suggesting that independent oil producers might want to acquire some refineries. Hmmmm….given his recent track record, maybe it’s time to start looking for acquisition candidates?

Disclosure: Author holds no position in any stock mentioned.